Home Affordability Becoming More Unequal Across U.S.

The Trulia Price Monitor and Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what's really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the monitors reveal trends before other price indexes do. With that, here's the scoop on where prices and rents are headed.

Prices Up 9.5% Year-Over-Year, and Rising in 98 of 100 Largest Metros: In May, asking home prices rose 1.1 percent month-over-month, seasonally adjusted. That's slower than in previous months -- asking prices rose 1.4 percent in each of February, March, and April (includes revisions) -- but still at a very fast clip. Quarter-over-quarter, prices are up 4.0%, seasonally adjusted. Year-over-year, prices are up 9.5% nationally and are higher than one year ago in 98 of the 100 largest metros.

Prices Rising Sharply in the Least Affordable Markets: Recent price gains are squeezing would-be buyers in metros where the cost of owning is steep. We created a measure of local affordability based on current asking prices and the most recent wage data available (from the 2012 third-quarter Quarterly Census of Employment and Wages survey). We estimated how far a typical worker's wages to go pay the mortgage on a standard-sized home (1800 square feet) at current mortgage rates (3.8 percent), using local wages and local asking prices. (Keep in mind that wages are not the only source of income, and some households have more than one wage-earner while others have none. That means the actual cost-of-housing burden for a particular household may be higher or lower, but our method is designed compare affordability across metros in an apples-to-apples way.) The monthly mortgage payment relative to the typical worker's wages ranges hugely, from a high of 74 percent in Honolulu and 55 percent in San Francisco to just 8 percent in Detroit and 12 percent in Houston and Atlanta.

Among the 10 least affordable metros, eight had double-digit price gains in the past year. Three (all in California) had price gains of more than 20 percent: Orange County, Oakland, and San Jose. Among the 10 least affordable metros, the average Y-o-Y asking price gain was 16.3 percent.

In contrast, among the 10 most affordable metros, prices rose 9.5 percent on average –- same as the national price increase, but well behind the average price gain for the 10 least affordable metros. The affordable metros of Detroit, Atlanta, Memphis, Fort Worth and Dallas all had double-digit price gains, but the rest of the most affordable metros had price gains below the national rate.

The Widening Affordability Gap –- and Why it Matters: Across all 100 metros, less affordable markets tend to have high price gains. The correlation between the Y-o-Y price gain and the mortgage-payment-versus-wage measure is 0.3 (statistically significant at the 5 percent level). That means that homeownership affordability is becoming more unequal across the U.S. -- the gap between more affordable and less affordable markets is growing. This growing gap means two things for the housing market:

First, as local markets become more unequal, more people will consider moving from less affordable to more affordable areas. The example of California makes this clear: In the years when California home prices were even more out of line with the rest of the U.S., more people left California for other states. Therefore, widening affordability gaps could cause more people to make long-distance moves to a more affordable local housing market.

Second, a widening affordability gap puts pressure on housing policy. It's harder to come up with one-size-fits-all national housing policies when local markets are becoming more different from each other. For instance, more expensive markets tend to benefit more from the mortgage interest deduction –- so as prices become more unequal, it means that the impact of any changes to the mortgage interest deduction would be even more concentrated in some geographic areas.

Rents Rising More Slowly in More Affordable Markets: Rents are up 2.3 percent year-over-year nationally. Rents are rising faster than prices in just 2 of the 25 largest rental markets: Houston and Philadelphia. Among the five least affordable rental markets, rents are rising strongly in Miami and Boston, steadily in New York, but only modestly in San Francisco and Los Angeles. In contrast, in three of the most affordable big-city rental markets –- Seattle, Las Vegas, and Sacramento -- rents were flat or falling.

Jed Kolko is the chief economist for online listings site Trulia. This article originally appeared on the Trulia Trends blog.

Kolko says strong tech-job growth is driving San Jose's property values beyond what's justified. But he believes the city is a long way away from a new bubble. After all, Trulia estimated San Jose home prices got as high as 59% above market fundamentals in 2005.

The City of Angels has gotten a little bit devilish when it comes to property values. Asking prices for L.A. homes shot up 13.7% over the past year -- way above a 1.6% increase seen in rents.

Kolko attributes the rising prices to strong demand sparked by good job growth and plenty of real estate investors, coupled with inventory shortages caused by lots of "underwater" homes. Those are properties where the owners can't easily sell because they owe more on their mortgages than the homes are currently worth.

Still, Trulia calculates Los Angeles property values haven't come close to the 78% over economic fundamentals that they reached in 2006.

Home prices are rising above fundamental levels in San Antonio and other Texas cities because the state's booming energy industry is spurring demand, Kolko says. He adds that property values in much of the Lone Star State didn't fall that sharply during the housing bust, so homes weren't all that cheap to begin with.

San Antonio has seen asking prices increase 7.6% over the past year even as rents gained just 4%. That's helped push prices to 5.1% above where fundamentals suggest property values should be, according to Trulia's calculations.

Still, today's excess valuations are less than half of the 12% above fundamental levels that Trulia estimates the San Antonio market saw in 2007.

Like San Antonio, Austin is seeing home values increase partly because of good times for the state's energy sector, according to Kolko. The city's large tech industry has also helped push average asking prices up 8.5% over the past year. That's well above the 6.3% increase in rents that Austin recorded in the past 12 months.

But the Texas capital looks like it's clear of a bubble so far. During the housing boom, Austin's home prices peaked at 12% above economic fundamentals in 2007.

This popular residential area adjacent to Los Angeles has seen asking prices on homes shoot up 18.6% over the past year. That's far above the 3.2% gain recorded for rents.

Kolko attributes the higher property values to strong investor demand, good job growth and a dearth of available residences due to underwater homes. But again, Trulia doesn't see a bubble forming. The site estimates Orange County home values got as high as 71% above market fundamentals in 2006.